On Wednesday, March 12, 2008, at 10 a.m., the Finance Committee of the United States Senate will hear testimony about "Alternatives to the Current Federal Estate Tax System". The hearing will be held in Room 215 of the Dirksen Senate Office Building.
According to the Finance Committee's posted schedule, statements will be presented by the following participants [Links added]:
What alternatives might be discussed at the hearing?
[UPDATE: You can watch a video replay of the Hearing to Consider Alternatives to the Federal Estate Tax System, online (via RealPlayer software), by clicking here.]
- Professor Lily Batchelder, New York University, School of Law, New York, NY [Witness Statement (posted after hearing)]
- Professor Joseph Dodge, Florida State University, College of Law, Tallahassee, FL [Witness Statement (posted after hearing)]
- Professor David Duff, University of Toronto, Faculty of Law, Toronto, Canada [Witness Statement (posted after hearing)]
Some possibilities might be found in prior studies prepared by attorneys or accountants (as opposed to economists, social scientists, or advocacy groups).
Perhaps some ideas will derive from the work of attorneys who prepared the "Report on Reform of Federal Wealth Transfer Taxes" (PDF, 227 pages), as members of a Task Force on Federal Wealth Transfer Taxes, sponsored by the Real Property, Probate & Trust Law Section of the American Bar Association, in 2004. That Report is broad in scope and exhaustive in detail.
Among the 34 members of that Task Force were some of the most knowledgeable attorneys in this country on the subject of wealth transfer taxation. Joseph M. Dodge served on that Task Force, and now is scheduled to offer testimony. I assume that the 2004 ABA Task Force Report will be a foundation of his testimony.
After a detailed analysis of the present law, the current problems presented by it, and the possible "fixes" for it, that 2004 Report presented, in its Appendix "A" (pp. 171-204) "Alternatives to the Current Federal Wealth Transfer Tax System".
Perhaps other, more expansive, ideas will derive from a Study, dated October 17, 2005, entitled "Understanding Tax Reform: A Guide to 21st Century Alternatives", prepared by the American Institute of Certified Public Accountants. That Study considered far more than "wealth transfer" taxation. But it endorsed the ABA's 2004 Report as a co-sponsor.
That AICPA 2005 Study indicated the importance of the American taxation system to the fiscal health of this country; and that situation has not changed much since:
The United States is on the brink of significant events that will impact federal tax revenues: (1) the "baby boomers" will start to retire, placing additional burdens on already strained entitlement programs; (2) the 2001 and 2003 tax cuts will expire, generating additional government revenues without corresponding examination of appropriate and fair tax burdens; and (3) the alternative minimum tax will grow exponentially, subjecting millions of taxpayers to unintended, higher levels of taxation.The Senate Finance Committee's hearing about possible alternative tax systems occurs in the midst of seven legislative proposals currently pending before Congress. See: PA EE&F Law Blog posting "CRS Summarizes Seven FET Proposals" (03/03/08).
Further, the debate over the appropriate levels of federal deficits and national debt — and thus, the appropriate levels of federal revenues and spending — is far from settled.
Finally, President Bush has made reviewing and reforming the federal income tax system a priority and identified three important tax principles to be considered: simplification, fairness and economic growth.
These events and concerns provide the impetus to undertaking federal tax reform at this time. * * *
These current legislative proposals follow others introduced in previous sessions of Congress, but never adopted. These bills were the subject of an analysis by the Tax Policy Center of the Urban Institute & Brookings Institution, entitled "Possible Estate Tax Compromises", posted on August 1, 2006.
From a "bird's eye" view, the history of the U.S. tax system appears more like a meandering stream, than an engineered canal. See: "History of the U.S. Tax System", posted by the United States Department of the Treasury.
Now, given the severe stresses afflicting our tax system, high-level analysis about its condition and possibilities for retooling it -- like that offered by these witnesses -- should be useful.
On the afternoon of March 12, 2008, the statements of the Chair, and of the three witnesses, were posted. I added links in the text above.
Also that afternoon, Forbes published an article, entitled "Senate Panel Weighs Estate Tax Overhaul", prepared by the Associated Press, which reported about the hearing, in part, as follows:
A Senate tax panel on Wednesday explored ways to overhaul the U.S. estate tax system as Congress struggles with the expiration of estate tax relief in three years.Updated: March 13, 2008:
Senate Finance Committee Chairman Max Baucus, D-Mont., said he wants to reach a bipartisan compromise on estate tax law changes before the current law expires in 2011 and rates shoot up."
We seriously need estate tax reform," Baucus said as the committee started the second of three hearings on the topic. The committee heard from three academics whom the panel encouraged to propose far-ranging plans to revamp the estate tax.
For example, Lily L. Batchelder, associate law professor at New York University School of Law, discussed replacing the estate tax system with a comprehensive inheritance tax. Under this regime, an individual "inheriting an extraordinary amount over his lifetime would pay income tax and a flat 15 percent tax on a portion of his inheritance," she said. She said such a change could be implemented without gain or loss to the U.S. Treasury if the first $2 million in lifetime inheritances were exempt from taxes.
Baucus said he didn't endorse any of the proposals presented by the witnesses. "But I do want the committee to have thought widely about the possibilities for replacing the estate tax," Baucus said. "And I hope that the debate will lead to a bipartisan estate tax compromise."
Analysts don't believe Congress will act on the estate tax issue during a presidential election year. * * *
WebCPA posted the following summary, entitled "Institute Lobbies for Permanent Changes to Estate Tax", on March 13, 2008, evidencing that the accountants remain committed to providing input towards a rational reform of the federal wealth transfer tax system:
Updated: March 14, 2008:
The American Institute of CPAs sent a letter to the Senate Finance Committee prior to its March 12 hearing on estate tax reform urging lawmakers to make permanent changes to the estate tax prior to the current law expiring in 2010.
In a letter, the institute reiterated a prioritized series of reforms -- a list that the AICPA had previously sent to Congress in 2005 and again in 2006.
The institute suggested the following:
- Make permanent the technical modifications to the generation-skipping transfer tax rules enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001.
- Increase the applicable exclusion (exemption) amount in order to eliminate filing and tax burdens for 90 to 95 percent of estates. The institute also suggests indexing the exemption for inflation.
- Retain the full step-up in basis to fair market value for inherited assets and avoid the complexities of carryover basis.
- Create a uniform exemption amount for estate, gift and generation-skipping transfer tax purposes. * Reinstate the full state estate tax credit, or provide another mechanism (such as a surtax) that would allow states to uniformly "piggyback" on the federal estate tax.
- Provide broad-based liquidity relief, rather than targeted relief provisions. Broad provisions that would apply to all illiquid estates would be both simpler and fairer to all taxpayers.
The AICPA Study on Reform of the Estate and Gift Tax System is available [here].
- Make the top estate tax rate no higher than the maximum individual income tax rate.
On March 13, 2008, The New York Times published an editorial entitled "New Hope for the Rich"regarding the federal estate tax, and its current reconsideration in the Senate. This is a portion of that editorial:
[I]n the Senate, Republicans are ready to do battle on behalf of America’s wealthiest families.
Starting in 2009, the estate tax will apply to Americans with property at death worth more than $7 million per couple, or $3.5 million for individuals — a whopping 0.3 percent of people who die each year.
As part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass, as early as Thursday.
Everyone knows that the Baucus proposal is better than the status quo: under current law, the estate tax will be eliminated in 2010 then revert in 2011 to the far higher levels that applied in 2001, before the Bush tax cuts.
Republicans, however, think that Mr. Baucus’s more-than-generous fix does not do enough to shield the wealthy. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes of those still covered by the 2009 rules. * * *